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Monday, September 28, 2009

Natural Gas Prices Could Fall As Storage Hits Capacity

I saw this interesting piece out from Bloomberg today.

The steepest rally in natural gas prices since 2006 is coming to an end as the 400 salt caverns, depleted oil fields and aquifers used to store the fuel in the U.S. reach capacity for the first time.

Stockpiles may surpass the record of 3.545 trillion cubic feet by as much as 350 billion cubic feet this fall, Energy Department estimates show. Gulf South Pipeline Co. says its fields in Louisiana and Mississippi are so full that customers will have to pay penalties for exceeding their limits. With no place to go, producers will be forced to dump excess fuel on the market.

The worst economic slump since the 1930s will cut demand from chemical plants to carmakers to households by 2.4 percent this year, according to government estimates. The November futures contract will drop about 19 percent to near $4 per million British thermal units, said Stephen Schork, president of consultant Schork Group Inc. in Villanova, Pennsylvania.

“I don’t know where all of this gas is going to go,” said Schork, a former natural gas trader on the New York Mercantile Exchange, who in June forecast inventories would reach near 3.8 trillion cubic feet. “We’re a month away from significant heating demand. Something’s got to give.”

The November contract has climbed 31 percent from its low of $3.662 per million Btu on Sept. 3, after economic reports signaled that the recession is ending and fuel demand will rebound in 2010. October futures, which expire today, have risen 48 percent from a seven-year low of $2.508 in the same period.

Gas for November delivery fell 16.8 cents, or 3.4 percent, to $4.78 per million Btu at 1:25 p.m. today in New York. The October contract fell 26.7 cents, or 6.7 percent, to $3.718.

There are many dynamics at work here, but even though we are getting closer to the heating season, and the economy has shown signs of bottoming, there is still a lot of natural gas supply out there. I see pressure on prices for a while longer, and a recovery in 2010 at this point. I still like it very much as an investment looking out over the next few years.

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Welcome to "In the Know." Here I discuss trends in the market, and how I think investors can profit from them. I'll discuss specific stocks, sectors, and economic/political trends.

I'm a student of the markets and am constantly looking for new ways to gain an edge, but for the most part, I'm a value guy. I think you have to be flexible to be a successful investor, but discipline is by far the most important factor.

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